Delayed Medicare Advantage reimbursement is among the top concerns of rural hospital operators, one of several factors expected to be a drag on rural hospital finances in 2024.
Rural hospitals, which tend to run on thinner operating margins than metro-area hospitals, have been hurt by reimbursement cuts, staffing constraints, inflation, the aging population and interest rate hikes. While they may find some financial relief through new operating models, Medicaid expansion and potential mergers and acquisitions, closures and service cuts are expected to increase next year, industry observers said.
Related: How rural hospitals are fighting Medicare Advantage
“There are so many independent rural hospitals that are burning cash at a rate that is not sustainable,” said Jim Kendrick, president and CEO of Plano, Texas-based Community Hospital Corp., which owns, manages and consults nonprofit community hospitals.
Rural hospital finances weaken
While overall hospital labor costs have started to ease since spiking in 2022, rural facilities have been slower to recover, given that it's harder to recruit doctors and nurses to their communities.
Relatively higher labor costs, in part, explain why more than 600 rural hospitals are at risk of closing, according to a November report from the Center for Healthcare Quality & Payment Reform. Meanwhile, nine closures occurred in the first 10 months of 2023, almost as many as in 2021 and 2022 combined, data from the University of North Carolina shows.
Short of closing, rural hospitals have continued to cut services. Maternity wards, which are expensive to maintain and difficult to staff, are often first to go. Nearly 270 rural hospitals eliminated their obstetrics programs between 2011 and 2021, according to forthcoming research from the consultancy Chartis Center for Rural Health. That represents nearly a quarter of all rural hospital obstetrics units, Chartis found.
“We’ve seen hospitals stay afloat by shedding service lines—many are shedding obstetrics because it’s difficult to staff and financially support,” said Michael Topchik, national leader at Chartis Center for Rural Health.
Medicare Advantage challenges
Rural hospital operators claim that relatively low Medicare Advantage reimbursement rates and payment denials threaten rural hospitals’ viability.
Medicare Advantage enrollment in rural communities has grown nearly 50% from 2019 through 2023, soon-to-be-published data from Chartis shows. Insurers that administer Medicare Advantage plans have increasingly denied claims and reimburse less than Medicare, squeezing rural hospitals’ margins, rural hospital and health system administrators said. In addition, unlike Medicare, Medicare Advantage plans are not required to fully reimburse critical-access hospitals for their treatment costs.
“Our critical-access hospital has no leverage to demand that the for-profit Medicare Advantage insurances pay claims appropriately,” Scott Taylor, administrator of Ozarks Community Hospital in Gravette, Arkansas, wrote in a July letter to state officials. “Those contracts make Medicare Advantage reimbursement look the same as Medicare on the surface, but the claims-payment practices of the commercial payers in reality yield 20% to 35% less money for the same service.” If Medicare Advantage reimbursement matched Medicare, Ozarks Community Hospital would’ve collected $16.5 million more in revenue in 2021 and 2022, Taylor said in the letter.
Rural hospitals and health systems, such as Wausau, Wisconsin-based Aspirus Health, have been asking state and federal officials to implement policies that would reduce Medicare Advantage claim denials and boost reimbursement.
“Medicare Advantage actually pays less than Medicare because of denials and all those hurdles insurers put in place,” said Matthew Heywood, president and CEO of Aspirus. “Some of the payers are making their profit through denials, which I don't think was the intent of the federal government. We’re trying to analyze and challenge that.”
Many rural hospitals don’t have the infrastructure to challenge claim denials, Kendrick said. “Medicare Advantage plans, through care denials, are crippling rural hospitals,” Heywood said.
Rural hospitals weigh M&A
Reimbursement cuts are pressuring rural hospitals and health systems to search for potential acquirers or merger partners.
Larger revenue cycle departments and better data analysis tools help rural hospitals mitigate claim denials and reimbursement declines, hospital and health system administrators say. Growing their networks could also help improve their negotiating leverage with commercial insurers.
“More mergers of rural health systems will get done in 2024 as organizations gather market share to negotiate better [rates] with insurance companies and improve access to capital,” said Darryn McGarvey, principal at consultancy CLA who specializes in advising rural providers.
Half of rural hospitals have negative operating margins, up from 43% last year, according to forthcoming research from Chartis. That may spur more merger and acquisition talks, Topchik said.
Rural emergency hospital program to grow
The rural emergency hospital program could relieve some of rural hospitals’ financial distress, industry observers said.
The rural emergency hospital program—one of several Centers for Medicare and Medicaid Services-backed models trying to buoy rural hospitals—is expected to grow in 2024, despite a relatively slow start. The program offers rural hospitals a 5% boost to Medicare outpatient reimbursement and an average facility fee payment of $3.3 million a year if they eliminate their inpatient beds and forgo 340B drug discount savings, among other stipulations.
Only 18 hospitals have converted to a rural emergency hospital since the program launched at the start of 2023, according to data from the University of North Carolina. The relatively low amount of conversions is largely attributable to providers’ reluctance to lose 340B eligibility, a program that allows hospitals that serve a disproportionate share of low-income patients to save an estimated 25% to 50% on outpatient drugs. States must also pass laws to register and license the converted facilities, potentially delaying conversions.
One study estimates around 70 of some 1,700 rural hospitals will likely convert to rural emergency hospitals. Unlike many industry observers, Topchik expects more than 300 rural hospitals to convert.
“The rural emergency hospital program is going to be a bigger relief valve in 2024,” Topchik said, noting that many states haven’t passed the requisite laws. “As financial pressures related to Medicare Advantage and staffing continue to mount, more will convert. This is just the tip of the iceberg.”
Meanwhile, more rural hospitals are testing out pilot programs from the CMS Innovation Center.
Ten critical-access hospitals are participating in the Frontier Community Health Integration Project, which increases reimbursement for ambulance, telehealth and skilled-nursing services provided by hospitals in sparsely populated areas. Eighteen hospitals are participating in the Pennsylvania Rural Health Model, which pays participating hospitals a fixed amount upfront, regardless of patient volume. Nearly 30 hospitals are participating in the Rural Community Hospital Demonstration program, which offers cost-based reimbursement for rural hospitals that don’t meet critical-access hospital criteria.
